This blog is mainly about the spectacular train wreck at The Sacramento Bee and its parent company, the McClatchy Company. But I also post about current events, the Iraq and Afghanistan wars, politics, anything else that grabs my attention. Take a look around this blog, hope you enjoy it.

Monday, May 4, 2009

New report challenges conventional wisdom that McClatchy would be turning a profit except for the Knight Ridder deal (updated)

Conventional wisdom in the newspaper industry is that McClatchy would be profitable if it hadn't been saddled with $2 billion in debt thanks to the Knight Ridder deal. But a report published by breakingnews.com debunks that view and claims McClatchy would be losing money even if it didn't have to pay down its massive debt.

McClatchy has $2 billion of debt, which it took on to buy Knight-Ridder, but sports a market cap of just $45 million. Yet it isn't all that debt that's making life hard at McClatchy.

Even if its creditors were to convert their loans to equity, cutting out interest payments entirely, McClatchy would still be losing money. In the first quarter, advertising revenues at the chain plunged 29% from the year before to $285 million. Sure, costs have fallen too, but by only 12%.

As a result, McClatchy has now reached a point where the price of paying its reporters and printing and delivering newspapers to its customers is $11 million greater than the income it generates. And that's before making the $34 million interest payments due to its creditors each quarter.

So if McClatchy entire debt was erased the company would still be losing money -- no investors would want a piece of this company. Which argues against restructuring the company in bankruptcy.

In most bankruptcies if the lenders convert to owners and the debt is reduced or eliminated, then a healthy company emerges from bankruptcy. But these figures indicate a post-bankruptcy McClatchy would not be healthy.

If conditions worsen over 2009 it will get harder and harder to make the case that McClatchy is worth saving. The lenders are more likely to cut their losses and opt for liquidation of the assets, land, equipment, etc.

If the corporate office decides to take action as the financial situation deteriorate, look for McClatchy to take a hard look at shuttering its papers that are the biggest money-losers.

UPDATE: Reader Walt-in-Durham took a close look at the numbers and says the Knight Ridder purchase actually reduced MNI's losses.

24 comments:

Anonymous
said...

OK, I'm done. Your blog was valuable when it passed along information, as in layoffs, changes, etc, in the far-flung McClatchy holdings. But you and your followers have devolved into conservative name-calling, as if all the economic problems of newspapers can be blamed on an occasional liberal editorial.

If liberal viewpoints were really to blame for this economic mess, why is Clear Channel, home to more conservative radio talk-show hosts, slashing personnel?

Frankly, I'm tired of the gleefulness many of your followers display at the plight of hard-working people whose only transgression was working as journalists. Too bad I won't have the opportunity to read the pithy repartee this post will produce. I have deleted your blog from my bookmarks.

Tim Geithner has a clever new way to "recapitalize" banks that fail the stress test: Convert the taxpayer's preferred stock to common stock.

From Geithner's perspective, this technique has several advantages:

The banks will suddenly seem healthy, because their assets-to-common equity ratios will rise. Geithner doesn't have to ask Congress for more baillout money yet.

Taxpayers won't understand that they're giving up a nice dividend and a safer security just to make the banks look better. If Geithner is right that what's wrong with the banks is just a temporary liquidity problem, the taxpayer should do well when the stocks rise. (We don't think he's right.)

Unfortunately, the plan also has two major flaws: First, it's smoke and mirrors. Second, the taxpayers will be even more exposed to losses than they are now.

Now, on the subject I beg to differ. It is not conventional wisdom that dictates McClatchy would be fine without the KR deal. That is a rare position taken by current McClatchy fans who were disgruntled long after the fact. It also include some that were screwed over by KR when they bought the Disney holdings.

No one, but no one in the financial community would ever make the claim that McClatchy would be sound if not for the KR deal. To the contrary, conventional wisdom dictates that without the KR deal, McClatchy would already be cooked and eaten.

6:41am I do share your sentiments. IMO, what started out as a venture to speak about the fiasco we call McClatchy has turned into nothing but a budget version of Fox News. Shame on you Mr. Moderator. I have no doubt that you were once a great writer/reporter but it is clearly apparent to me that you have formualted this site for the sole purpose of spreading junior high type name calling and just plain unproffesional "reporting" of what you think are facts. Like that site you listed in your initial paragraph is such an authority on news.

...These clowns have quit defending the Bee, or journalism, and are now wallowing in the 'poor me' phase of liberal angst. How precious is the 'I'm leaving now 'post! The party is over and these obnoxious folks won't leave. Like the twits they are, they only say they'll leave. These few, this gutless band of botherers.

I've been told -- by a couple of people who ought to know -- that most of the McClatchy papers are still at least marginally profitable, including the Miami Herald despite the huge circulation hit that it has taken. If you want to find the source of the company's losses beyond its interest payments, it might be better to look at the Washington Bureau and the corporate offices. And for God's sake, why is McClatchy still sending reporters to Iraq on two-month rotations? That's a gigantic expense that doesn't come close to being cost-effective.

And for God's sake, why is McClatchy still sending reporters to Iraq on two-month rotations? That's a gigantic expense that doesn't come close to being cost-effective.=====Maybe they're acting as mules. Someone has to ferry the Al Queda and Hamas payments.

The foreign corros are so biased, their reporting is useless. I am beginning to believe Hamas is paying the freight. They can leave MNI and go right to Al Jazeera without missing a beat. On second thought, I think Al Jazeera’s standards are higher than McClatchy’s gutter reporting.

The Messiahs green minions relish the death of newspapers, liberals rejoice in saving the planet. Some journos fainted at Barry’s soaring speeches. They were so into their worship, they didn’t hear the words, “Forsake the paper, save the planet,” and “Let them fail.”-----------@Green Inc.[Snip]“The decline in newspaper readership was being expressed as an environmental victory. Some of our online readers at Green Inc. agreed.“It’s an excuse to save money, which it will, but it will also [reduce environmental impact,”] wrote Russ Finley. [“Win-win.”]Another reader, named Rick, said: [“Newspapers are bad for the environment.] Now it’s been said out loud. [Let them fail.”] [“Forsake the paper, save the planet,”] he added.

12:27 PM Nothing personal but you are a prime example of who was mentioned earlier. You claim that if not for the KR deal you'd still have a job and stand on your opinion when the math doesn't support your contention. It supports the opposite, that you would be gone regardless, sooner.

Not only newspapers but comic books, paperbacks, text books, magazines, movie posters, printer paper, the whole lot. Why stop with just the Daily Bugle when you're on a roll? There's a point when you can absolutely go "over the top" with all this Green Stuff. At least the trees are a renewable resource.

I ran the numbers from the first quarter of 2006, the last first quarter before the KR acquisition. Assuming no hiring freeze, a 30% loss in ad revenue and increasing all other expenses, except depreciation, for inflation, the pre-KR MNI would have lost $62 million. MNI with KR only lost $37 million. It is reasonable to say that KR has reduced MNI's losses.

However, the $2.6 billion in debt puts the company in real trouble. Before the KR deal MNI had a relatively manageable $153 million in debt. A bad quarter, as Q1 '09 was, would be just that, a bad quarter. The company would have tapped their revolving credit facility and carried on. They might have instituted a hiring freeze or even cutbacks. But, they certainly would not have been forced to.

Thanks, Walt. I've said before that MNI has been happy for the KR cash flow and it's unfair to blame us for all MNI's woes. Also for the record, papers all over the group have been scrimping and saving and starting to do staff cuts (first with small voluntary programs) as early as April 2008. MNI was starting to squirrel away resources long before the big bad Q1 2009. I think it's possible we just might squeak through this mess. God willing they're not paying all the CFOs to screw up the projections ..

Thanks, Walt. I've said before that MNI has been happy for the KR cash flow and it's unfair to blame us for all MNI's woes. You are welcome. The numbers are what they are. And there is nothing wrong with the KR properties. The problem is the debt MNI took on to acquire KR. Absent KR and the debt, MNI would be having a rough quarter like the rest of the industry. Had MNI closed the deal with KR earlier I don't even think they would be in this shape.

MNI was starting to squirrel away resources long before the big bad Q1 2009. I think it's possible we just might squeak through this mess. God willing they're not paying all the CFOs to screw up the projections .. May 4, 2009 8:40 PM A lot depends on how long this recession lasts. If, as I expect, it continues for two or three more quarters, MNI will be in technical default by the end of 2009. If we have hit bottom and there is an upturn in Q4 '09 then MNI might avoid a technical default. Then the question becomes will the credit markets have unfrozen enough to refinance the debt?

I disagree with the article that started this whole thread. I think MNI can work this out in Bankruptcy. I think that option is off the table because the McClatchy family has too much wrapped up in owning a newspaper chain. So far they have taken that option off the table. I think the article is guilty of projecting the sales losses from Q1 '09 too far into the future. However, the real question is did the cuts in staff, both editorial and sales hobble MNI to such an extent that when revenues rebound with the economy MNI won't be able to return to a more normal situation. My other concern is that MNI is not investing in the technology that will allow it to prosper in the digital era.

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